Here’s why U.S. oil is trading at its biggest discount to the global crude benchmark since 2015

Wednesday, 16 May 2018 | 20:00

Prices for Brent crude, the global oil benchmark, and West Texas Intermediate, the U.S. standard-bearer, took different paths on Tuesday, widening the spread between the two grades to more than $7 a barrel for the first time since mid-2015.

The Brent/WTI spread has reached its “widest level in 3 years driven by a continued increase in U.S. domestic crude production particularly from shale,” said Will Rhind, chief executive officer of GraniteShares.

In Tuesday trading, June WTI crude CLM8, -0.38% was 7 cents, or 0.1%, lower at $70.89 a barrel on the New York Mercantile Exchange, while July Brent LCON8, -0.77% traded at $78.76 a barrel on ICE Futures Europe, up 53 cents, or 0.7%.

That's a price difference of $7.87 a barrel—the highest since about May 2015, according to FactSet data.

“U.S production is rising faster than it can be absorbed into the [economy's] broader transportation infrastructure, creating a glut,” Rhind said. “The U.S. picture [contrasts] with the rest of the world, which is worried about continued OPEC output cuts, mainly from Iran and Venezuela decreasing supply.”

FactSet

Total U.S. oil production stood at 10.7 million barrels a day for the week ended May 4, according to the Energy Information Administration. That's a record based on weekly EIA data dating back to January 1983. The EIA will issue its latest weekly data Wednesday.

In particular, crude output from shale has made steady monthly gains since the beginning of 2017. A monthly report the EIA released Monday said crude-oil production from seven major U.S. shale plays is expected to see a climb of 144,000 barrels a day in June to 7.178 million barrels a day.

High stockpiles of crude at Cushing, Okla., the delivery point for Nymex crude, has contributed to the highest price spread between the U.S. and international crude oil, said James Williams, energy economist at WTRG Economics.

Oil stocks at Cushing stood at their highest level of this year, at nearly 37.2 million barrels as of the week ended May 4, according to EIA data.

Meanwhile, there's an “expectation of a shortage in deliveries of light crude to Europe,” driven by concerns surrounding crude oil from Iran on the heels of the Trump administration's plan to reimpose economic sanctions on Iran, said Williams. The expected shortage of crude deliveries to Europe raises Brent prices, but has less impact on WTI, he said.

For now, Tyler Richey, co-editor of the Sevens Report, said he believes that the “path of least resistance is still higher for energy futures broadly, as Brent continues to lead the way to new multiyear highs.”

But looking further ahead, it'll “likely be the Brent contract that pulls back first when the geopolitical backdrop settles down, which would result in a compressing [Brent/WTI] spread,” Richey said.
Source: MarketWatch